CHAPTER 6

SAVING AND INVESTING

LEARNING OBJECTIVE

• I understand how the entire community benefits when I put money in a savings account

LEARNING OBJECTIVE

• I can identify advantages and disadvantages of savings and time deposit accounts

DECIDING TO SAVE

• Benefits of Saving: (3-12 mths of income)

– Allows business expansion• Increases Income for Others

– Allows Higher Standard of Living– Earn on savings

• Savings Trade-offs:– Immediate Access = – Higher Interest =

SAVINGS ACCOUNTS AND TIME DEPOSITS

• Savings Account –

• Immediate withdrawal – no penalty• Money Market Deposit Account –

• Only allowed certain # of withdrawals a month

TIME DEPOSITS

• Requires deposits to remain for certain period of

• Most Common is a CD (Certificate of Deposit)– States amount deposited, Length time till maturity, Rate

of interest being paid

• Advantages:– Pays higher interest than savings account

• Disadvantages:

INSURING DEPOSITS

• 1929 Stock Market Collapse New Deal– Signed by Franklin Roosevelt

• Created Federal Deposit Insurance Corporation (FDIC)– Protects: – Protection up to – Protects some special retirement accounts

• National Credit Union Association (NCUA)

LEARNING OBJECTIVE

• I can identify advantages and disadvantages of savings and time deposit accounts

LEARNING OBJECTIVE

• I understand how investing in stocks and bonds as a retirement option would be beneficial

INVESTING: TAKING RISKS WITH YOUR SAVINGS

STOCKS AND BONDS• Corporations sell stock• Use for Expansion

• Stock Returns• Stockholders (ownership) 2 benefits:

• Capital Gains and Losses• Capital Gain – • Capital Loss –

BONDS

• Receipt from business or government for

• Promise to repay borrowed funds with interest over stated period of time• NO

DIFFERENCES IN STOCKS AND BONDS

STOCKS• Issued by ALL Corporations• Represent Ownership• No fixed dividend rate• Dividends only paid if profits• No maturity date• Stockholders elect BoD which

controls corporation• Stockholders only have claim

after all creditors have been paid

BONDS• Corporations not required to

issue bonds.• Bonds represent debt• Bonds pay fixed rate of interest• Interest must always be paid,

whether profits or not• Have a maturity date for

repayment• No voice or control in running of

corporation• Have claim against property

and income of a corporations BEFORE stockholders

TYPES OF BONDS• Tax-Exempt Bonds

• Earnings Not Taxed by Gov’t (fed, state, or local)• Investment for wealthier

• Savings Bonds

• Very Safe, Not taxed until cashed

• T-Bills, T-Notes, T-Bonds• Sold by Treasury Department

• Interest is Tax Exempt from State and Local BUT NOT Federal Government

• Mature few days to 26 weeks• Minimum Investment $1,000

• Maturity dates 2 to 10 years

• Matures in 30 years

STOCK MARKETS• Broker –

• Charges a fee based on $ amount traded• Online Trading available as well

• Stock Exchanges

• Also regional and among many countries• Companies are largest most profitable in world

• Over the Counter Markets• Stocks not listed on organized exchanges• National Association of Securities Dealers Automated Quotations (NASDAQ) – largest

• Usually sold in amounts of 100 shares• Stock Market Indexes

• Indicator used to determine what happened to stocks on market

• 30 major industrial companies in the United States

• Tracks stock prices of 500 companies

BOND MARKETS• New York Exchange Bond Market and American Exchange

Bond Market (2 largest)• Sold Over-the-Counter and Online

• Mutual Funds• Pulls money from many investors• Diversified• Managed

• Individual constantly views and switches investments • Collects Fee

• Mutual Funds are NOT Insured by the Federal Government

GOVERNMENT REGULATIONS ON STOCKS, BONDS, MUTUAL FUNDS

• Securities and Exchange Act of 1934• Sets up the • Attempt to avoid another Stock Market Crash

LEARNING OBJECTIVE

• I understand how investing in stocks and bonds as a retirement option would be beneficial

LEARNING OBJECTIVE

• I can identify other retirement opportunities I can take part in to be able to retire comfortably

INVESTING FOR RETIREMENT

• Social Security Act (1935)

• Designed to get elderly to retire and open up jobs for unemployed during the Great Depression

• Today, only a • Encouraged to have separate retirement plan

INDIVIDUAL RETIREMENT PLANS• Pension Plan (Done through your Employer)

• 401(k)• Portion of check withheld• Matched by Employer

• 403(B) – Employer CANNOT match contributions• Keogh Plan

• Keogh Act of 1962

• Max 15% of Income a year

• MyRA• IRA (Traditional)

• Contribute up to $4,000 a year• Contributions and Interest Earned not taxed until Withdrawal (after 59 ½)

• Roth IRA• Contribute up to $4,000 a year

• Interest earned is tax-free forever if taken out after 59 ½ • No taxes when money gets withdrawn

REAL ESTATE INVESTMENT

• Advantages:• Values tend to increase over time• Up 700% since 1980

• Disadvantages:• No guarantee for demand in future (especially on raw

land)• Cannot turn into cash fast

LEARNING OBJECTIVE

• I can identify other retirement opportunities I can take part in to be able to retire comfortably

LEARNING OBJECTIVE

• I can identify the benefits and trade-offs of investing in a retirement account or saving money

HOW MUCH TO SAVE AND INVEST?

• Trade-Offs

• HOWEVER – • Other high interest debt?• Pay it off first

OTHER CONSIDERATIONS• Amount of Risk• Higher Risk = • Liquidity

• Spreading Out Your Investments

• Little Income – • Greater Income –

• Values• Community needs more development – Savings Bank• Companies that promote the same values and ideas as

you?• Environmental Protection Companies?• Charitable Companies?

LEARNING OBJECTIVE

• I can identify the benefits and trade-offs of investing in a retirement account or saving money